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Investing Back Home: Return Migration and Business Ownership in Albania

Recent research indicates Albanian households with higher exposure to past migration experience are more likely to invest in a small business upon the completion of their “migration cycle.” Both the destination and timing of migration play a role in determining investment decisions: households with migrants that traveled to countries beyond neighboring Greece in the earlier waves of migration in the 1990s have a significantly higher likelihood of owning a small business.

Following the collapse of the former socialist regimes, labor markets in Central and Eastern Europe have undergone a rapid and intense transformation. In Albania, a bloated public sector employing over 850,000 individuals shrank to less than a quarter of its original size between 1991 and 2001.1

The resulting economic hardships, accompanied by geographical proximity and the lure of western affluence, led many Albanians to migrate to neighboring countries as a way to sustain or improve their economic position. In the span of a decade, more than one-fifth of the Albanian population is thought to have moved abroad, mainly to neighboring Greece and Italy.

The Albania Living Standards Measurement Study survey 2005 (ALSMS05)—which contains an unusually rich set of information on international migrants over the 15 years prior to the survey—is based on a nationally representative sample of 3,640 households. These data were used in a recent policy research working paper to document household past migration experience and its impact on business formation.2 The explanatory variable of interest is total months spent abroad by all household members between 1990 and 2004.

Much of the migration from Albania, particularly to Greece, has traditionally been temporary, whether seasonal or circular. Figure 1 shows that the return of migrants has steadily increased since the early 1990s, particularly from Greece.

Figure 2 shows that the intention to migrate again is highest for the most recent returnees, suggesting that these late returnees may have not yet completed their “migration cycle” and are likely to migrate again in the near future. This group of returnees also appears to be, on average, worse off than earlier returnees, again an indication of insufficient “accumulation” of savings and knowledge abroad.

The empirical analysis of the effects of past migration experience can be challenging because the decision to migrate in the past, and to later return, may depend on unobservable household characteristics that influence outcomes of interest. In the absence of panel data, instrumental variable (IV) regression is used to solve the endogeneity problem and to identify the migration decision.3

International migration plays an important role in small business sector development in Albania

The development of a vibrant private small business sector to sustain economic growth is believed to be an important strategy for countries, such as Albania, that suffer from high unemployment and are striving to reduce poverty. Development of micro-enterprises is often constrained by inadequate start-up capital and a lack of technical know-how. Migration could play a significant role in overcoming these obstacles by providing capital through remittances and overseas saving, and gathering technical skills obtained throughout the migration cycle.

Of the 3,640 households included in the ALSMS05 sample, 641 households (18 percent) reported running a household enterprise. These are generally small, low-return, informal businesses. Only 18 percent reported the use of hired labor, and this was often minimal.

Around 25 percent of these businesses are operated from home, and another 30 percent are either mobile or roadside establishments. While about half of these households reported having relied on domestic savings as a source of start-up capital, over 95 percent of them indicated drawing also on either remittances or overseas savings.

Both the destination and timing of migration play a role in investment decisions in non-farm businesses

The empirical results indicate that household past-migration experience exerts a positive impact on the probability of owning a non-farm business. A one-year increase in household past- migration experience raises the likelihood of being involved in non-farm self-employment by about 5 percent, on average. However, this effect seems to differ according to the destination and the timing of migration.

In view of difference in terms of opportunities offered by the various country destinations, Albanian migrants in Italy and countries further afield are expected to enjoy higher earnings and accumulate higher levels of savings and human capital, compared to their counterparts in Greece. The empirical results support this hypothesis, finding that while one additional year in Greece increases the probability of household business ownership by roughly 7 percent, a similar experience in Italy or a destination further away raises the probability by over 30 percent.

Furthermore, the impact varies based on the timing of migration. In line with previous literature on Albania migration, the completion of a “migration cycle” —multiple migration episodes prior to a permanent settling, either in the host or native country—is involved.1

The findings suggest that migrants who returned earlier—indicative of the achievement of some stability in Albania—are strongly associated with business ownership. The same is not true for more recent returnees, who are less likely to have completed their “migration cycle” or to have accumulated enough savings to invest in their own business.

2. This brief is based on World Bank Policy Research Working Paper 4366 by Talip Kilic, Calogero Carletto, Benjamin Davis, and Alberto Zezza, “Investing Back Home: Return Migration and Business Ownership in Albania,” 2007.

3. These instruments pass all relevant empirical tests to ensure instrumental validity. Readers are directed to the policy research working paper for a rigorous theoretical defense and test results.

GERO CARLETTO is a Senior Economist in the Development Research Group (Poverty Team). His research interests include poverty, migration, and rural development. He is a member of the Living Standards Measurement Study (LSMS) team, and has extensive experience in the design, implementation and analysis of household surveys. Email: gcarletto@worldbank.org

TALIP KILIC is completing his Ph.D. in Economics at American University, Washington, DC. His research interests include migration, poverty, project impact evaluation, and rural development. Email: talip.kilic@yahoo.com.

BENJAMIN DAVIS is a Senior Economist with the Food and Agriculture Organization of the United Nations (FAO). His research interests include migration, food security, and impact evaluation of rural development programs. Email: Benjamin.davis@fao.org.

ALBERTO ZEZZA is an Economist with the Food and Agriculture Organization (FA0). His research interests include food security, poverty and rural development.Email: alberto.zezza@fao.org